What is it? A straightforward recession? Stagflation? Or a simple cycle of economic boom-bust ? A debate has ensued among macroeconomists here with one large group insisting that it is a straightforward recession while smaller splinters are divided between those who predict stagflation and those that argue that what is happening is nothing more than the usual dip of the normal boom-bust cycle from which niether the booming US economy could escape at the end of Clinton era, nor would Britain by the end of Labour government’s three terms of high economic achievement.

Some economists have started advising the government to spend its way out of the looming recession without bothering about budgetary deficits. They are even urging the Bank of England to cut rates. But most have warned the government as well as the BoE to go about tackling the problem with a lot of caution and moderation.

The global credit crunch has become too acute for the British economy to remain unscathed; higher food and energy prices are affecting the consumers as well as the producers very badly. Companies report slowing domestic sales and orders. Housebuilders and retailers, in particular, are feeling the pinch. However, some believe so far the manufacturing sector has escaped the impact of what seemingly is a recessionary trend and there is a hope that this sector would lift the entire economy out of its gloom in due course of time, that is by 2010.

There is little doubt that high oil prices and weaker domestic demand will hurt manufacturers’ profitability. The latest survey by the British Chambers of Commerce(BCC) is clearly gloomy. Despite the boost of a weaker pound, it draws parallels with the start of the 1990s when credit was in short supply and house sales collapsing.

UK manufacturers are said to be less vulnerable to the effects of slowing demand than in the 1990s. Mass-produced, price-sensitive components are said to account for a smaller part of output.

However, those who believe the economy is moving in the wrong direction claim that the UK is in serious danger of heading into recession. An increase in the number of firms reporting fewer orders, more job cuts and less investment is the latest indication that the British economy is suffering from the effects of the global credit crunch and the steep rise in the price of fuel, food and other raw materials. Firms in the service sector have seen “alarming” declines in the past three months, with those reporting lower orders outnumbering those recording rises for the first time since1990. The BCC said if these trends continue, the business sector would enter recessionary cycle in the next three months.

Recent government figures showed that manufacturing production in May dropped unexpectedly by 0.5 per cent from the previous month, and was down by 0.8 per cent on this time last year. The wider measure of industrial production, which includes output from utilities and mining, also posted a decline of 0.8 per cent n May.

David Frost, head of the BCC was quoted by the media saying: “These results show a real risk of recession in the coming months. This is deeply worrying, not just for business, but for the consumer too, with both manufacturing and services reporting negative results. The temptation for the government will be to raise business taxes in the next pre-budget report because the exchequer is running out of money. This would be a catastrophe.”

The soaring cost of raw materials and fuel is causing companies to cut investment in plant and machinery. Manufacturers in five of the 12 regions are scaling back, with the sharpest declines in the south-east. The BCC said the balance of manufacturers intending to raise prices hit an all-time high - 45 percentage points - for the third quarter in a row, with raw material increases also affecting the service sector.

A separate survey by REC/KPMG showed that the number of people placed in permanent jobs fell again in June, while vacancies for full-time staff dropped for the first time in five years. Alan Nolan, a director at KPMG was quoted by the media saying: “This really is a sobering set of figures proving the credit crunch has finally taken its toll and is severely weakening the UK jobs market.” The UK stock market has also suffered some jitters from the after effects of the credit crunch and the economic downturn.

Import price inflation is currently running at a 15-year high of 12.3 per cent. Until recently, most of this reflected higher energy and commodity prices. But the fall in the pound seen since last summer has also prompted a rise in import price inflation of finished manufactures. As for the trade deficit, with exporters still seemingly using the lower pound to boost their profit margins rather than cut prices, a widening in the deficit from £7.6 billion in April to around £7.8b billion in May is expected.

As both the export orders and exports sales balances of the manufacturing sector rose sharply, it appears that exporters are benefiting from the weakness of the pound. But it is becoming clear that this will not be able to offset the slowdown in the domestic economy that appears to be gathering pace by the day .Indeed, all firms reported that cash flow has deteriorated to levels not seen since before 1992. And with confidence in profitability and turnover also having fallen to levels not seen since the last recession, it might not be long before many companies are forced to scrap investment projects and slash employment.

However, according to Capital Economics Ltd., a London based research firm, with the net balance of all firms stating that they expect to raise their selling prices over the next three months having risen to yet another record high, inflation fears will continue to prevent the MPC from supporting the economy by cutting interest rates in the very near term.

“Admittedly, the normal time lag between changes in interest rates and the response of the economy means that it is too late for the MPC to prevent a recession. But price pressures are likely to mean that the MPC will not be able to limit the depth and length of the downturn either,” said the CEL.